My thesis is meta (NASDAQ:meta) faces capital allocation challenges as prominent investors question their metaverse approach. Overall, Meta has tremendous earning power, but it is important that this is not wasted on poor capital allocation decisions.meta We need to make the right capital allocation decisions at the right time regarding reinvestments in the business, acquisitions, share buybacks and dividend issuances.
2021 10-K Reality Labs segment operating profit increased from ($6,623 million) on revenue of $1,139 million in 2020 to ($10,193 million) on revenue of $2,274 million in 2021 is shown. On the other hand, the App Family segment’s operating profit is $39,294 to $84,826 million in 2020 revenue, $115,655 million in 2021, $56,946 million.
Compare June 2022 figures for the six months ending June 2021 with Q2 2022 figures release, the Reality Labs segment went from operating income of $(4,259) million on revenue of $839 million to operating income of $(5,766) million on revenue of $1,146 million. Meanwhile, the Family of Apps segment went from operating income of $28,004 million on revenue of $54,409 million to operating income of $22,647 million on revenue of $55,583 million.
These operating losses from the Reality Labs segment are staggering, totaling $22.58 billion from January 2020 to June 2022. [$6,623 million + $10,193 million + $5,766 million]The $3.57 billion increase in these losses from 2020 to 2021 is terrifying. Meta has tremendous earning power, but its capital allocation choices, including its Reality Labs segment, have been questioned.Renowned investor Bill Gurley recently murmured Meta says he should have written off the $10 billion he spent on the trip.
I think Meta should consider issuing a small dividend. The payout ratio doesn’t have to be high, but the business is mature enough to return some money to shareholders this way. Some say companies stop innovating when they have to return capital regularly through dividends or Apple (AAPL) are given as an example. ASML (ASML) and TSMC (TSM) returns capital to shareholders in regular dividends.
Apple’s 10-K through September 2021 shows net income of $94.7 billion and cash flow statement for cash flow from operations less stock-based compensation (“SBC”) and $85 billion in capital expenditures of 145 It shows a billion dollar dividend payout. Meta’s 2021 10-K shows net income of $39.4 billion and cash flow from operations, net of SBC and capex, of $29.9 billion. I think Meta should commit to a relatively small annual dividend of $1 billion. This low number leaves enough cash for reinvestment in the business, acquisitions and stock buybacks.
If Meta commits to a dividend policy of at least $1 billion annually, management would be slightly more restricted in its financial decisions than it is today. Limiting CEO Zuckerberg’s capital allocation decisions would be silly, considering those who doubted he bought his Instagram with his $1 billion now look ridiculous. maybe. But times have changed, and even a small $1 billion annual dividend can give him enough firepower to do what he thinks is best for shareholders with the remaining cash generated each year.
Looking at 2Q22 10-Q and 2021 10-K, trailing 12-month (“TTM”) net income was $33,630 million or $14,152 million + $39,370 million – $19,892 million. Given the way Meta has demonstrated its ability to rapidly increase net income over the years, I believe the company is worth a high multiple of TTM net income. From 18 times net income 22x seems to imply a valuation range of $60.5 billion to $740 billion.
In 2Q22 10-Q, there were 2,280,672,002 Class A shares and 406,876,470 Class B shares outstanding as of July 22, for a total of 2,687,548,472 shares. Multiplying this by the August 19 stock price of $160.32 gives a market capitalization of $431 billion. Enterprise value is assumed to be less than market capitalization, with cash and marketable securities exceeding debt and leases. Given these considerations, I believe the stock will be a long-term purchase if management can avoid making poor capital allocation decisions.
Disclaimer: The content of this article should not be relied upon as formal investment recommendations. Never buy stocks without doing your own thorough research.